Credit Tighter for Small Firms

Citing the economic downturn, more banks are raising lending standards for small businesses, the Federal Reserve reported this week

In a survey of senior loan officers at 56 domestic banks, about 50 percent said they tightened lending standards for small firms in April, up from 30 percent in January. The number was even higher among U.S. branches of foreign banks, the report said.

Loan officers blamed tighter credit conditions on a less favorable economic outlook, a reduced tolerance for risk and decreased liquidity.

At the same time, demand for business loans has continued to weaken, the report said.

Last month, the National Federation of Independent Business, a Washington-based lobby group, reported a slight decline in borrowing among small businesses. It says the downturn could reflect tougher lending conditions, though only 2 percent of 1,800 small-business owners recently surveyed cited the availability of credit as a top concern, compared to 37 percent in 1982.

"Undoubtedly, some small businesses borrowed from branches of Wall Street banks now short of capital to lend," William Dunkelberg, the group's chief economist, said in a statement.

Sen. John Kerry (D-Mass.), the chairman of the Senate Committee on Small Business and Entrepreneurship, said the Federal Reserve report underscores the need to temporarily reduce fees on government-backed small-business loans.

In February, Kerry introduced a bill to provide $200 million to cut borrower and lender fees for Small Business Administration 7(a) loans, the federal government's main lending program for small businesses.

"The credit crunch has gotten worse," Kerry said in a statement, "making it harder for small businesses to expand their payrolls and invest in new equipment."